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On the surface, it seems like a great idea — the market rallies for a few days or weeks, and the VIX – the market’s volatility index, or “fear gauge” – trades lower It seems inevitable that stocks will pull back at some point, which would cause the VIX to rise, so you establish a position in one of the many exchange-traded products tied to the VIX.

There’s one problem, however – unless you’re exactly right on your timing, the natural deterioration of the underlying value will cause the trade to go against you fairly rapidly. That hasn’t stopped the industry from flooding the market with no fewer than 10 exchange-traded notes designed to track the VIX in various ways:

Over time, the prices of these ETNs have had a natural downward trajectory for three reasons: First, the much-publicized problem of tracking error being compounded on a daily basis will cause these to underperform the VIX. The longer the time frame, the greater the underperformance. Second, the fact that the ETNs have to roll from month to month in VIX futures means that they give up a premium by rolling out of the expiring contract and move into the higher-priced, longer-dated contract each month. Third, of course, is the issue of expense ratios.

The result, especially for the most popular VIX ETN – the iPath S&P 500 VIX Short-Term Futures – is a chart that eerily resembles an out-of-the-money option slowly going to zero:

This chart also demonstrates the extent of VXX’s underperformance since its inception in early 2009. The key issue with the VXX’s shortfall relative to the VIX is that you can be right on your trade and still end up losing money.

Defenders of leveraged ETNs will note that they are designed for daily tracking, not longer-term tracking as in the chart shown above. Nevertheless, even a holding period as short as one week – here, the period from June 20 to June 27 – can bring slippage for the VXX relative to the VIX. Again, this means that the investor be exactly right in choosing an entry point. In the case of the leveraged ETNs, this problem is only compounded.

The industry has responded by offering VIX ETNs that hold positions further out in the futures curve, and in multiple months (say the fourth, fifth, sixth, and seventh month out). While this structure is designed to dampen the effect of rolling the near-term contract month-to month, the results don’t yet show a meaningful solution to the problem of underperformance. This can be seen in the recent performance of the iPath Long Enhanced S&P 500 VIX Mid-Term Futures ETN relative to the VIX:

There is only one time when these VIX ETNs make sense, and that’s when the VIX spikes above 45. At that point, the odds are with you that the fear gauge will revert to the mean in relatively short order. The best play in this scenario is to establish a short position in one of the inverse ETNs, thereby making the inefficiency of these products work for you rather than against you. Still, the occasions when this strategy can work are few and far between – only seven times in the past 15 years has the VIX traded above 45.

The bottom line: while the VIX is a great tool for assessing market sentiment, it isn’t something that investors should look to trade using the current ETN offerings. With so many options available to play the market’s direction, there is no reason to expose your portfolio to the ongoing problems with these ETNs.

As of this writing, Daniel Putnam owned no positions in any of the VIX ETNs mentioned here.